Short Term Vacation Rental Liability Insurance is Not Enough for Homeowners

A few days ago, short term vacation rental industry leader Vrbo “quietly” announced the official launch of a homeowner insurance program. Their new $1 Million Liability Insurance provides protection to homeowners in the event of guest injuries during their stay. It’s likely that travel news sites like TNooz are calling this launch a quiet one due to Airbnb’s launch of a $1 million damage-protection guarantee to homeowners back in 2012.

While liability insurance is a must-have, these days we know it’s not enough for many vacation rental homeowners.   

What’s Missing From Short Term Vacation Rental Liability Insurance

Yes, in most locations across the US you must show proof of $1M in liability insurance in order to  receive an short term vacation rental permit. Although many listing sites and vacation rental property managers offer liability insurance policies, they may or may not provide coverage if a guest damages your property or someone else’s during their stay. In fact, this new insurance offering from Vrbo specifically states, “Vrbo will continue to look at options to further protect owners against the unexpected challenges involved with managing a vacation rental. Please note, $1M Liability Insurance does not cover damage caused by a traveler to your own property.”

Vrbo’s new policy goes on to explain, “if a traveler accidentally damages the property of a third party (such as a neighbor) while staying in your rental property that third party may sue you for that damage, this program may provide coverage for these types of claims.” The keywords to note there are “may provide coverage.”

Meanwhile, claims filed by a landlord against a host who has rented out his or her unit are covered in Airbnb’s basic fees. Every property listing site and property manager’s insurance coverage is different. Some are considered “primary coverage,” meaning it provides coverage up to their specific limit whether or not the host has other insurance.  

We know, it’s complicated. However, it’s something every homeowner has to work through although the vast majority of guest stays are are uneventful. As with any type of insurance policy, it’s those outlying incidents that can really set you back. Every now and again tragedy can, and will, strike.

Attempting to Manage Vacation Rental Security Deposits and Damage Waivers

Currently, many listing sites like Vrbo have you determine and manage your own security deposit and damage waiver within your rental agreement along with your deadline for receiving the funds, signing the contract, determining cancellation policies, and setting refund policies. Homeowners must also include when they can expect the refund if no damage has occurred, outline what would be considered a violation, and determine which types of violations would result in partial or total loss of deposit refund.

Although sample rental agreements can be found, it’s a lot of responsibility for homeowners. There’s also a great deal of risk involved if the agreement is not crafted properly or contains loopholes.

Vacation Rental Security Deposits: How They Work

A security deposit is an amount separate from the total rent price. The security deposit is often held on a credit card but not charged to the guest if no damage is found after their stay. On the other hand, if a lamp is broken, the amount needed to replace it will be taken out of the security deposit to help cover damage to the property or replace items.

Security Deposits: Common Issues

Challenging to Set and Manage Total Deposit Amount: Many homeowners are never quite certain what to charge, and the total cost of rent plus a security deposit can frighten away potential guests. For example, if a guest wants to rent a property for $2,500 a week, you could require a $250 security deposit, or 10% of the total weekly rate. However, many homeowners are unsure of how much to charge since the deposit is the maximum the guest will have to pay for any damages unless the homeowners rental agreement states otherwise. Some charge a percentage of the total rent (which often fluctuates based on the time of year), others pick a flat rate of $500 or even $1,200 — it’s a mess for homeowners (and guests).

Negative Impact on Guest Bookings: The largest problem with a security damage deposit a that guests hate them. Numerous studies have been conducted over the years that show any damage deposit deters rental bookings. There is an inconsistent experience from rental to rental, and potential guests are often frightened away by additional charges. So, if you charge a deposit you can likely expect your total number of rental bookings to drop.

Impossible to Collect Charges Exceeding Original Deposit: Any damages that exceed the total of the deposit are almost impossible to collect. Credit card companies have specific policies that protect guests from being charged for damages that were not originally defined and agreed upon before their stay. So, when homeowners try and recoup additional damage, they are very likely to lose a chargeback fight with a guest and often result in a negative reviews.

Vacation Rental Damage Waivers: How They Work  

Damage waivers are not insurance at all, it’s simply a fee a guest pays to waive themselves of any damage claim. Guests pay for the waiver, which then covers accidental damage during the time they spent at your property. The waiver may contain limits up to several thousand dollars, depending on the specific terms. Waivers often cover mishaps such as broken electronics and cracked windows, glass, and doors.

A damage waiver has been shown to be more appealing to renters than a deposit because they feel more confident in the amount they will pay (it’s usually smaller than a security deposit), and they don’t have to pay a large sum of money up-front that they may or may not get back. 

Damage Waivers: Common Issues

Numerous Exclusions Leave Homeowners High and Dry: Many industry damage waivers have a number of exclusions. Very few protect against damage that was “intentional.”  For instance, a wine stain on a rug is often considered due to a party and not part of the damage waiver. Also, no industry waiver you find will cover repairs, routine maintenance, or standard item replacements such as linens.

Extensive Documentation Is Required: Industry policies also require extensive documentation, timely filings, and ultimately a final judgment is made by the company who issued the waiver in the first place. Often times they determine to not cover the damage, and the entire process can take weeks, if not months.

Things to Consider

While we believe that the type of policies covered by Vrbo or Airbnb will not put a homeowner at risk, we also firmly believe that they are not enough. These policies do little to protect owners overall, and are no substitute for an owner having their own policy that specifically covers short-term rental activity at a home. 

Additionally, policies from Vrbo or Airbnb only cover bookings made from their own websites. They do not cover friends staying at a home, bookings made directly with an owner, or bookings made from other sites. From our experience, these policies will satisfy bank lending requirements or rental pool requirements, both of which often state an owner must have their own insurance. Also, policies from both companies only begin kick-in after the owner’s own, separate policy. This means that the likelihood that they will even be used is incredibly small, but you still need to pay.

We hope you found this educational! If you have questions or comments, please feel free to contact us

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